GENERAL PURPOSE PAYMENTS

In 1997-98, general purpose payments to the States will comprise general revenue assistance in the form of FAGs, SRA and NCPs. In contrast to most SPPs, general revenue assistance is not required to be spent by the States in a specified area.

General revenue assistance is estimated to amount to $16,830 million in 1997-98, an increase of 3.3 per cent on the previous year. The estimates of general revenue assistance for 1997-98 have varied from those presented at the 1997 Premiers' Conference in line with movements in the CPI.

FAGs account for the bulk of general revenue assistance. The level of FAGs is indexed to movements in the CPI in the year to the March quarter and in accordance with projections of the population as at 31 December each year. The indexation of FAGs is guaranteed on a rolling three year basis subject to the States complying with obligations under the Agreement to Implement the National Competition Policy and Related Reforms.
SRA can be funded from within the pool of FAGs or directly by the Commonwealth. Payments funded from within the pool reduce the level of FAGs by that amount and hence are effectively funded by the States in line with their weighted population shares. These payments are added back to the pool when determining the base level of FAGs for the next year (see Table 8).
- In 1997-98, SRA will comprise the Medicare guarantee payments to New South Wales and Victoria and payments to the Australian Capital Territory for transitional allowances and special fiscal needs.
NCPs will commence in 1997-98 in accordance with the Agreement to Implement National Competition Policy and Related Reforms. A State's receipt of NCPs is conditional on compliance with the obligations of the Agreement.

Table 7 sets out general revenue assistance by type of payment and State for the period 1993-94 to 1997-98.

Table 7: General Revenue Assistance to the States, 1993-94 to 1997-98 ($million)

(a) The table shows the gross level of FAGs to the States. The actual payments made to some States in 1996-97 and 1997-98 will be reduced by all or part of their fiscal contributions to the Commonwealth.

(b) Estimates - final figures (except for transitional allowances and special fiscal needs for the ACT) will depend on the actual increase in the CPI for the four quarters to March 1997 and March 1998, and the determination of the Statistician as to the population at 31 December 1996 and 31 December 1997. Final figures for FAGs will also depend on final figures for HFGs.

(c) In 1993-94 and 1994-95, identified road grants were distributed on the basis of the average arterial road allocations for the three years to 1991-92. From 1995-96, the distribution of the grants was progressively moved to a distribution based on FAGs. In 1997-98, these payments will be absorbed into FAGs.

Level of Financial Assistance Grants

At the 1997 Premiers' Conference, the Commonwealth agreed that the real per capita indexation arrangement of FAGs would be extended to 1999-2000. This continues the three year rolling guarantee of FAGs real per capita indexation which was introduced in April 1995 for the forthcoming financial year and following two years.

In 1997-98, FAGs to the States are expected to total $16,144.0 million, with the real terms adjustment and the per capita adjustment estimated to contribute $124.6 million and $197.8 million respectively. Final amounts will depend on the actual increase in the CPI for the four quarters to March 1998, the determination of the Statistician as to the population at 31 December 1996 and 31 December 1997 and final figures for HFGs.

Table 8: Level of Financial Assistance Grants (FAGs) 1997-98 ($million)(a)

(a) The table shows the gross level of FAGs to the States. The actual payments made to some States in 1996-97 and 1997-98 will be reduced by the amount of their fiscal contributions to the Commonwealth.

(b) This is the amount set by the States Grants (General Purposes) Act 1994, as base assistance for 1996-97.

(d) Based on a projection (prepared by the ABS on the basis of assumptions agreed to by Treasury) of an increase in the Australian population between 31 December 1995 and 31 December 1996 of 1.3 per cent. The final figure will depend on the determinations of the Statistician as to the population at those dates.

(e) Estimates - final figures will depend on the determination of the Statistician as to the population at 31 December 1995 and 31 December 1996.

(f) Assumes year average CPI growth of 0.8 per cent in the year to the March quarter 1998. Final figures will depend on the actual increase in the CPI.

(g) Based on a projection (prepared by the ABS for the Budget on the basis of assumptions agreed to by Treasury) of an increase in the Australian population between 31 December 1996 and 31 December 1997 of 1.2 per cent. The final figure will depend on the determinations of the Statistician as to the population at those dates.

(h) Estimates - final figures will depend on the actual increase in the CPI for the four quarters to March 1998 and the determination of the Statistician as to the population at 31 December 1996 and 31 December 1997.

The 1996 Premiers' Conference agreed that the funds which were previously paid to the States as identified road grants (IRGs) will be absorbed into the FAGs pool from 1997-98. Table 9 shows the amount of each State's FAGs which are notionally attributable to the IRGs which will be absorbed in 1997-98.

Table 9: Notional Identified Road Grants ($million, estimated)

Distribution of Financial Assistance Grants

The distribution of FAGs among the States reflects the decision at the Premiers' Conference that it should be based on the States' populations as at 31 December of each year and per capita relativities assessed by the Commonwealth Grants Commission (CGC).

The per capita relativities are applied to the State populations in order to arrive at a weighted population share for each State. A State's FAGs are equal to its weighted population share of the combined pool of FAGs and unquarantined HFGs, less the HFGs it receives. The distribution and level of HFGs among the States are determined by the Medicare Agreements between the Commonwealth and the States.

Tables 10 and 11 set out the estimated distribution of FAGs for 1996-97 and 1997-98, respectively.

The 1997 Premiers' Conference adopted the per capita relativities recommended in the CGC's 1997 Update report. The terms of reference for the 1997 Update report required the CGC to use the same methodology which it employed to calculate the relativities adopted at the 1996 Premiers' Conference. (The role of the CGC is discussed in Chapter II.)

Table 12 shows that the total redistribution between the States implied by the 1997 Update report relativities is $49.3 million compared to the previous relativities. This is significantly smaller than the redistribution of $126.6 million implied by the amended 1996 Update report relativities, and entails a redistribution of grants away from Western Australia, Queensland and the Australian Capital Territory to the other States.

Table 10: Financial Assistance Grants to the States, 1996-97 (estimated)

(a) The projected population as at 31 December 1996 has been prepared by the ABS on the basis of assumptions agreed to by Treasury. These projections are subject to revision.

(b) The per capita relativities adopted at the 1996 Premiers' Conference.

(c) For ease of presentation, weighted population shares rounded to one decimal place are shown. However, in calculating row (5), unrounded shares are used in accordance with the States Grants (General Purposes) Act 1994.

(d) Estimated unquarantined HFGs - that is, total HFGs less the incentives package, the bonus pools, Medicare benefit adjustments and the other health services component.

(e) The table shows the gross level of FAGs to the States. The actual payments made to some States will be reduced by the amount of their fiscal contribution to the Commonwealth.

Table 11: Financial Assistance Grants to the States, 1997-98 (estimated)

(a) The projected population as at 31 December 1997 has been prepared by the ABS on the basis of assumptions agreed to by Treasury. These projections are subject to revision.

(b) The per capita relativities adopted at the 1997 Premiers' Conference.

(c) For ease of presentation, weighted population shares rounded to one decimal place are shown. However, in calculating row (5), unrounded shares are used.

(d) Estimated unquarantined HFGs - that is, total HFGs less the incentives package, the bonus pools, Medicare benefit adjustments and the other health services component.

(e) The table shows the gross level of FAGs to the States. The actual payments made to some States will be reduced by the amount of their fiscal contribution to the Commonwealth.

The main factor responsible for the redistribution is the substitution of 1995-96 for 1990-91 in the five-year review period of the CGC's assessment. The primary impact on grant shares of updating the review period was through changes in the CGC's assessment of disabilities which affect revenue raising capacities and expenditure requirements. More detail is provided below and in Table 12, with the emphasis on factors relevant to those States most affected by the 1997 Update report.

The decline in Western Australia's grant share was due almost entirely to the replacement of 1990-91 assessments with those for 1995-96. The assessment reflects a higher assessed revenue capacity and an increased share of the SPPs that are included in the CGC's assessments. The latter included a three-fold increase in its Grant in Lieu of Royalties which are related to the North West Shelf project area.
The decline in Queensland's grant share was also largely attributable to the replacement of 1990-91 assessments with those for 1995-96. Its revenue raising capacity increased in areas such as payroll tax, land revenue and business franchise fees. Its relative costs of providing services fell in government education, agriculture and fisheries services, and housing.
The main factor driving the small reduction in the Australian Capital Territory's grant share was an increase in revenue raising capacity in areas such as payroll and gambling taxation. This was due to changes in assessment data within the 1996 review period rather than the advancement of the review period.
New South Wales and Victoria gained the largest increases in grant shares, due mainly to their revenue raising capacities falling relative to those of Western Australia, Queensland and the Australian Capital Territory.

Table 12: Effects of Commonwealth Grants Commission's Recommendations on the Distribution of FAGs ($million)(a)(b)

(a) Derived from Table 3-5 of the CGC's Report on General Revenue Grant Relativities - Update 1997.

(b) Based on the estimate of the 1996-97 FAGs/HFGs pool given in Budget Paper No. 3 1996-97, as used by the CGC in its 1997 Update report.

Further information is provided in the CGC's 1997 Update report.

National Competition Payments

At the April 1995 Council of Australian Governments (COAG) meeting, the Commonwealth and the States concluded the Agreement to Implement the National Competition Policy and Related Reforms. Under the Agreement the States are eligible for three tranches of ongoing NCPs. The NCPs will commence in July 1997 at a level of $200 million in 1994-95 prices and increase in July 1999 and July 2001, to $400 million and $600 million respectively, in 1994-95 prices.

Each State's NCPs are subject to the State making satisfactory progress with the implementation of specified reform conditions in the Agreement. Prior to the scheduled commencement of NCPs in July 1997, the National Competition Council will assess whether each State has met these conditions and provide a final report for consideration by the Commonwealth. The NCC will conduct similar assessments before the commencement of each tranche of payments.

Subject to satisfactory progress, the Commonwealth will provide the States with NCPs estimated to total $215.1 million in 1997-98. The Agreement specifies that the NCPs will be paid on a quarterly basis and distributed between the States on an equal per capita basis. Table 13 shows the allocation of NCPs in 1997-98 if each State meets its obligations under the Agreements.

Table 13: National Competition Payments, 1997-98 ($million)(a)

(a) Estimates. Final figures will depend on the actual increase in the CPI and the Statistician's determination of population as at 31 December 1997.

Special Revenue Assistance

The 1997 Premiers' Conference agreed to maintain the existing arrangements for the funding of the major part of the Medicare guarantee payments to New South Wales and Victoria from the pool of FAGs and HFGs. Pool-funded SRA will not be provided for other purposes in 1997-98. The Commonwealth will directly fund SRA for the Australian Capital Territory's transitional allowances and special fiscal needs and to meet an agreed component of the Medicare guarantee payments.

Table 14: Special Revenue Assistance, 1997-98 ($million)

(a) Figures for the Medicare Guarantee Payments are estimates - final figures will depend on the actual increase in the CPI for the four quarters to March 1997 and March 1998 and the determination of the Statistician as to the population at 31 December 1996 and 31 December 1997.

(b) Transitional allowances and special fiscal needs are not adjusted for changes in the CPI or population.

Funding Arrangements for the Australian Capital Territory

The Australian Capital Territory receives funding not available to the other States in the form of transitional allowances and special fiscal needs. The level of payments in 1997-98 reflects the recommendation of the CGC in its 1997 Update report.

Transitional allowances are designed to assist with the Australian Capital Territory's transition from the generous levels of Commonwealth funding which existed before self-government. In 1997-98, transitional allowances will amount to $20.7 million, a decrease of $7.9 million over 1996-97. This amount incorporates additional transitional allowances for education and hospital services of $10 million which the Commonwealth has agreed to provide to the Australian Capital Territory in accordance with the CGC's recommendation. The Commonwealth will also provide an additional $5 million in 1998-99. The CGC's assessment was that the Australian Capital Territory needed some additional time to implement changes to employment conditions to avoid the high costs it inherited from the Commonwealth. The CGC also indicated that, given the comprehensiveness of its review, these additional allowances should be treated as the final payments required to place the Australian Capital Territory on an equal footing with the States in all areas except policing.

Special fiscal needs are payments to the Australian Capital Territory in recognition that certain functions (for example, the Family Court) are not funded by the Commonwealth, whereas in other States funding arrangements exist between the Commonwealth and the State. In 1997-98, special fiscal needs will amount to $13.8 million, an increase of $0.2 million from 1996-97.

Medicare Guarantee Payments

It is estimated that in 1997-98 New South Wales will receive Medicare guarantee payments of $191.8 million, of which $155.7 million will be funded from the pool of FAGs, and that Victoria will receive $244.4 million, of which $218.2 million will be funded from the pool.

The funding of the five-year Medicare Agreements which commenced on 1 July 1993, and the Medicare guarantee payments, were explained in Budget Paper No. 3 1993-94.

At the 1993 Premiers' Conference, the levels of the Medicare guarantee payments to New South Wales and Victoria were calculated by comparing the gain from distributing the pool of FAGs and HFGs using per capita relativities adjusted for the Medicare Agreements, against the amount the Commonwealth had guaranteed would be the benefit from using Medicare adjusted per capita relativities. Actual payments in 1993-94 and until the Agreement terminates in 1997-98 were to be set by adjusting the level of the guarantee payments agreed in the 1993 Premiers' Conference in line with the growth in the pool of FAGs.

It was decided at the 1993 Premiers' Conference that the Commonwealth would fund around half of the Medicare guarantees to New South Wales and Victoria ($107.7 million in 1993-94), but that this contribution would halve in 1994-95, with a concomitant increase in the payments funded from the pool. At the 1994 Premiers' Conference, it was decided to defer this change in the funding arrangements to 1995-96, at a cost to the Commonwealth of $55.8 million. In accordance with that decision, at the 1995 Premiers' Conference, the Commonwealth reduced its contribution to around one-quarter of the cost of the Medicare guarantees to New South Wales and Victoria.

Following this formula, it was decided at the 1997 Premiers' Conference that the Commonwealth will contribute $62.3 million to funding the guarantees, with the balance to be met from the FAGs pool. The cost to the other States of funding the guarantee payments will be $182.0 million in 1997-98. The net benefits to New South Wales and Victoria of the guarantee payments will be $81.0 million and $163.4 million respectively. (The net benefits to New South Wales and Victoria are less than their guarantee payments because they contribute to the pool-funded component of the guarantees in line with their shares of the FAGs/HFGs pool.)

Changes in the Distribution of General Revenue Assistance

Table 15 sets out the impact on the distribution of general revenue assistance of revised population figures for 1997-98, the 1997 per capita relativities, changes in the distribution of HFGs, arrangements for Medicare guarantee payments and other special revenue assistance, and the introduction of NCPs.

Table 15: Factors Affecting the Estimated Distribution of General Revenue Assistance, 1997-98 ($million)(a)

(a) The table is based on the gross level of FAGs to the States. The actual payments made to some States will be reduced by the amount of their fiscal contributions to the Commonwealth.

(b) Column (1) was calculated using the 1997-98 level of base HFGs, $4102.9 million, but distributed among the States using 1996-97 base HFG shares.

(c) The effect of using the CGC's 1997 Update report relativities as adopted at the 1997 Premiers' Conference as against those used for 1996-97. This column differs from the final row of Table 12 as it applies the 1997 Update report relativities to the current estimate of the 1997-98 FAGs/HFGs pool, whereas Table 12 uses the same FAGs/HFGs pool as used by the CGC in its 1997 Update report.

(d) Shows the net impact of Medicare guarantee payments of $191.8 million to NSW and $244.4 million to VIC, of which $36.1 million and $26.2 million respectively are funded directly by the Commonwealth (see Table 14) and account for the total net contribution to general revenue assistance of $62.3 million. The net benefit to NSW and VIC is less than the Medicare guarantee payments as funding part of the payments from the pool of FAGs reduces FAGs to NSW and VIC.

(e) Comprises transitional allowances and special fiscal needs.

(f) Sum of (1) to (7). This amount is equal to the sum of row (7) of Table 11, the NCP data shown in Table 13 and the last column of Table 14.